Tesla Finds Strength In Another Deal With Mercedes

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by Clean Energy Intel

Tesla Model S.  Image used with permission from Tesla

Last week was a very good week for Tesla (TSLA) stock – up 13% on the day on Thursday and ending the week at $32.31, up a solid 8.2% from the previous Friday’s close. This was partly because the company’s earnings statement provided a loss that was below expectations – but probably largely a result of the announcement that the company has secured another deal with Mercedes.

Tesla’s third-quarter net loss widened to $65.1 million from $34.9 million a year ago. However, excluding items, the loss was 55 cents a share versus market expectations of 60 cents.The company also raised its forecast for 2011 revenues from a previous range of $180 million to $190 million to a higher range of $195 million to $200 million. Overall the earnings announcement was just enough to keep the market in a forward-looking mode.

What got the market excited was no doubt the announcement by the company in a letter to shareholders of another deal with Mercedes, which sounds like a considerable expansion of the previous agreement between the two companies. As things stand, we have little detail on the deal beyond the following:
  • Mercedes has issued a letter of intent to Tesla on the agreement
  • It relates to the provision of  ‘full powertrains in the Mercedes line’
  • A fuller announcement will be made towards the end of the year
This deal, alongside the company’s deal with Toyota over the electric RAV4, once again illustrates that Tesla can compete effectively in terms of both peformance and cost in terms of both battery packs and powertrains. The deal with Toyota is worth $100m and the deal with Mercedes certainly has the potential to be of a similar magnitude.

Tesla has indicated, in a Company Overview this summer, that its battery pack costs for the Model S are roughly in the 320 to 450 $/kwh range. In 2010 average costs in the industry were 650 $/kWh or higher. Consider this: Tesla is a luxury end provider with what appears to be the lowest costs in the industry for Lithium battery packs on a $/kWh basis.
Moreover, there has been some discussion that there may be another deal with Toyota on the way – with a price tag of as much as $1 billion on it. You can read more about that potential deal here.
Finally, you can read my more detailed thoughts on the outlook for the electric car in general and Tesla in particular here.
The bottom line is that, with its 300 mile range, the Tesla Model S is out on its own in terms of what it can deliver. No other automaker is remotely talking about delivering a pure EV with such a range. The company has already taken deposits for 6,500 units of the Model S and seems set to create a significant niche market for its product. Moreover, the company has plenty of room for growth in its powertrain business, with strong relationships with both Mercedes and Toyota. Given these facts, it certainly seems that Tesla’s stock has plenty of room on the upside.

I currently have no position in Tesla having taken profits on a previous holding. I intend to use any lower prices to re-enter that position.

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), producedby a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.


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